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Exam 7: Investments

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Question 1

Multiple Choice

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Nontax factor(s) investors should consider when choosing among investments include:

A) before-tax rates of return.
B) after-tax rates of return.
C) liquidity needs.
D) before-tax rates of return and after-tax rates of return.
E) before-tax rates of return and liquidity needs.

F) A) and D)
G) C) and D)

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E

Question 2

Multiple Choice

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Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt Sue is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of both types of debt, resulting in a tax basis of $9,000 and an at-risk amount of $7,000. During the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount?

A) $0; all of her loss is allowed to be deducted.
B) $2,000 disallowed because of her at-risk amount.
C) $2,000 disallowed because of her tax basis.
D) $4,000 disallowed because of her tax basis.
E) $4,000 disallowed because of her at-risk amount.

F) C) and E)
G) B) and C)

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Question 3

Multiple Choice

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The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is:

The netting process for capital gains (losses) with 0/15/20 percent, 25 percent, and 28 percent capital assets helps maximize the tax benefit of:

Which taxpayer would not be considered a material participant of an activity?

Roy, a resident of Michigan, owns 25 percent of a fourplex in the nearby college town of Ann Arbor with three other friends. The fourplex is rented to students who attend the University of Michigan. Roy's responsibility is to approve new tenants each year and take care of any maintenance issues. During the year, the rental property generated a $25,000 loss, which was split equally among Roy and his three friends. Assuming Roy's only source of income was $145,000 of salary, how much of the rental loss can Roy deduct this year and what amount must be carried forward?

Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.

Doug and Sue Click file a joint tax return and decide to itemize their deductions. The Clicks' income for the year consists of $90,000 in salary, $2,000 interest income, and $800 long-term capital loss. The Clicks' expenses for the year consist of $1,500 investment interest expense. Assuming that the Clicks' marginal tax rate is 35 percent, what is the amount of their investment interest expense deduction for the year?

Brandon and Jane Forte file a joint tax return and decide to itemize their deductions. The Fortes' income for the year consists of $121,000 in salary, $1,500 interest income, $2,000 nonqualifying dividends, and $2,100 long-term capital gains. The Fortes' expenses for the year consist of $3,525 in investment interest expense and $1,000 in tax preparation fees. Assuming that the Fortes' marginal tax rate is 32 percent and they make no special elections, what is the amount of investment interest expense deduction for the year?

Qualified dividends are always taxed at a 15 percent preferential rate.

In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses?

What requirements must be satisfied before an investor may receive preferential tax treatment on dividend income, and what preferential treatment will result?

Scott Bean is a computer programmer and incurred the following transactions last year. *Purchased when originally issued by Provo City. What is the net short-term capital gain/loss reported on the 2020 Schedule D? What is the net long-term capital gain/loss reported on the 2020 Schedule D? What amount of capital gain is subject to the preferential capital gains rate?

Sarantuya, a college student, feels that now is a good time to buy stocks. However, because she doesn't have any savings, she decides to borrow $24,000 at an annual interest rate of 8 percent. She must make an interest-only payment each year for five years, plus repay the entire principal in Year Five. On August 1, 20X8, when Sarantuya obtained the loan, Sarantuya invested $14,500 in several individual stocks and used the remaining $9,500 to pay her tuition for the year. Assuming Sarantuya's investment income this year is greater than her investment interest expense this year, how much investment interest expense can she deduct in 20X8? (Round your intermediate calculations tothe nearest whole percent.)

When a taxable bond is issued at a premium, the taxpayer may elect to calculate and apply the yearly amortization amount to reduce a portion of the actual interest payments that taxpayers include in gross income.

Capital loss carryovers for individuals are carried forward indefinitely.

Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year?

Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($17,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $119,000 of salary, $10,400 of long-term capital gains, $3,400 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?

John holds a taxable bond and a municipal bond. Which are considered part of John's deductible investmentinterest expense?

Cory recently sold his qualified small business stock for $90,000 after holding it for 10 years. His basis in the stock is $40,000. Applying the rules as if the stock were acquired in 2020 and assuming his marginal tax rate is 32 percent, how much tax will he owe on the sale?